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Executives

Gabi Seligsohn – President and Chief Executive Officer

Dror David – Chief Financial Officer

Analysts

Edwin Mok – Needham & Company

Liron Rochman – Oscar Gross

Marcel Herbst – Herbst Capital Management

Nova Measuring Instruments Ltd. (NVMI) Q1 2011 Earnings Call May 4, 2011 9:00 AM ET

Operator

Good day, and welcome to the Nova Measuring Instruments’ First Quarter 2011 Results Conference Call. This conference is being recorded.

At this time, I would like to turn the conference over to you host today, [Mr. Gabriel], CCG Investor Relations.

Unidentified Company Speaker

Thank you, operator, and good day to everybody. I would like to welcome you to Nova Measuring Instruments first quarter 2011 results conference call and presentation and thank management for hosting this call.

With us on the line today are Mr. Gabi Seligsohn, President and Chief Executive Officer; Mr. Dror David, Chief Financial Officer.

I'd like to draw your attention to the presentation that accompanies today's call. The presentation can be accessed and downloaded from a link on Nova's website at www.nova.co.il.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it on the Investor Relations or news section of the company's website at www.nova.co.il.

Gabi will begin with the call – with the business update followed by Dror with an overview of the financials. We will then follow with the question-and-answer session.

I would now hand over the call to Mr. Gabi Seligsohn, Nova's President and CEO. Gabi, please go ahead.

Gabi Seligsohn

Thank you, Gabriel, and thank everyone for attending today’s call. The first quarter was another remarkable quarter for the company. It marked the ninth consecutive quarter of growth in both revenues and profitability. It also provided a great start for what we believe will be a third consecutive year of outgrowing the industry.

The first quarter was also a record-breaking quarter in bookings. In particular, it was our best ever quarter by far for booking on stand-alone optical CD tools. We are very excited about the state of affairs as it exemplifies just how important last year’s strategic penetration were, now that the follow-on orders are coming from both memory and foundry customers for our leading edge stand-alone products.

Our exposure to both of the industry's leading sectors of foundry and memory continues to benefit us. This is especially important during these times when strategic decisions by key players such as Apple, which today have an economy of scale impact on the entire semi-food chain, benefits some of our customers and hurt other. It is for that exact reason that we are so well positioned and supply to all leading foundries and almost all leading memory players. This will ensure that we continue to extract much of our success from today’s highest growth sectors of mobile computing and smartphones. The combination of exposure to a diverse customer base within the higher growth sectors together with the recent penetrations resulting in record bookings also support our strong guidance.

Today's earnings results demonstrates yet again the extensive operational leverage, we have built into the company. Though we continue to deliver results that exceed our long-range profitability model, we strongly believe that the model of 20% to 25% net margin, which we have presented in the past is the right one for the long-term. Continuing to invest now will allow us to retain the technological leadership, we have achieved so far and further distance ourselves from our competitors. Fortunately, our stated target model affords us the ability to do so. Maintaining a strong commitment to continued development of leading edge technology in several areas will secure our market position for the future.

Now, let me turn to some more details on the quarter. Revenues during the quarter came in at about the middle of our guidance while net profitability exceeded the top ends of our guidance by about 1%. This increase in net margins relates to be a combination of favorable product mix as well as R&D expenses coming in lower than we expected because we were not able to move as quickly as we wanted on some development projects.

As mentioned, we are working vigorously to enhance the pace of our product development efforts, though in some cases, this may take us more than a single quarter. Dror, will provide more insight into this area during his prepared remarks.

Revenues reflected four customers at or above 10% with foundry playing a larger role in the overall mix of orders. Booking wise, we had five customers at or above 10%.

During last quarter’s conference call, we spoke of our strategy for the next 12 to 18 months. The first element focuses on expanding our share of currently addressable markets. In that respect I would point out two areas of positive development.

First, I'm happy to see that in recent months, most of our high-end application development efforts at customer site have extended into the EDGE area. This is a case in both new evaluations as well as recent penetrations. But it's especially important given the significant addition EDGE stuffs and the importance of measuring critical EDGE parameter using optical CD.

It was recently estimated by several sources that the number of EDGE players when moving from 65 nanometers to 28 nanometers in foundries grows by about 50%. Given our very strong position in the foundry segment, we see a significant growth opportunity coming our way.

Secondly, I would also point out that our next generation optical CD tool which will be announced later this year is already in high demands and is scheduled for delivery for more than five customers during the second half of the year. This provides a lot of support for our belief that our next generation tool will become a real vehicle for further increasing our market share in next generation technology nodes.

The second part of our strategy is related to expending to new addressable markets. Here we have spoken about our plans to move into the 3-D interconnect sector where we can expand our existing customer relationships by offering a wider variety of products.

I'm happy to report that we are on track with the development of our new system and plan to shift several evaluation units during the second half of the year. Feedback on early test results with a few of our strategic customers shows that we are building a competitive product, which will offer several important capabilities.

Now, let me turn to overall market trends as we see them. In recent weeks, we have heard both from equipment suppliers and their quarterly earnings call as well as through announcements by a few customers that business will soften in the near-term. We just quoted for this softening relates to low consumer electronics consumption in Japan, lower than expected penetration of Android based tablets such as the Samsung Galaxy, wafer supply shortages given that over 60% of global consumption relies on a Japanese supplier et cetera. Despite that our working assumption as well as that of many others continues to be that wafer fab equipment spending will grow at the expected rate of 12% to 17% to cover for shortages at the high end of technology nodes.

As reflected by our bookings, foundry spending this year will increase at the high end. Even though one of the top foundries has announced a pause in capital spending for the coming few months, we continue to receive large scale orders from their peers as places where we have been designed into the process.

On the flash memory side, we have three of the four key suppliers as our customers that have enjoyed large volumes of business, given the role that flash players in the smartphone and tablet markets. While there is wide spread agreement that DRAM spending will be down this year in light of reduced ASPs and some softness in the PC market, we continue to enjoy nice volumes from that segment. The reason for this is related to the role our process control solutions play in today’s DRAM sector.

Starting at the 4x technology node, we have seen a significant increase in our business volumes at DRAM sales, given wafer sampling rate increases, which translate into more tools being needed. Talking with our customers, we believe that the stage is being set for another technology shrink down to the 3x coming earlier than expected perhaps as early as the end of 2011. We see that as a positive sign for more growth going forward as sampling rates will increase even more at that node.

Now, let me turn to the outlook. As stated, we have been keeping an ear to the ground to assess possible changes to our outlook. I would like to point out clearly that we haven’t seen any push outs of orders, which we have already received. We are aware of some announced delays and new project expand to begin during the second quarter and expect those orders relevant to us to shift by about one quarter.

Although, we do not have visibility, which extends through the end of the year, our record bookings, some of which extends through the third quarter, show the picture, which is quite strong. In today’s press release, we stated our guidance for the second quarter of 2011. We expect revenues of $28.5 million to $31 million with net profitability ranging between 27% and 30%.

And with that operator, let me turn it over to Dror for a closer view at the numbers. Dror?

Dror David

Thanks, Gabi, and welcome, everybody to our quarterly conference call. Before I start with an overview of 2011 first quarter results, I would like to note that the numbers presented in the press release and in all the following discussions represent GAAP based results.

Total revenues in the quarter were $28.2 million, at the middle of the range of our guidance, up 4% quarter-over-quarter, and up 76% over the comparable quarter of last year. Product revenues in the quarter increased by 6% while service revenues decreased by 2%, due to slightly lower time and material activities in the quarter. As previously reported and as mentioned in the press release, quarterly product bookings were at its record levels in each of the product lines during the first quarter of 2011. These record booking are a direct results of our extended customer base. And during the quarter, five customers accounted for more than 10% of bookings.

Product bookings distribution was 65% from the foundry segment and 35% from the memory segment. Asia-Pacific accounted for 79% of total bookings and the rest of the bookings came from North America and Europe.

Focusing on the standalone Optical CD product line, I would like to note the following. We’ve previously reported that during 2010, we have been able to conclude standalone Optical CD evaluations and receive bookings from seven additional customers, which practically doubled our customer base for this product line. The expansion of the customer base in 2010 has resulted in record standalone Optical CD bookings in the first quarter of 2011 all representing repeat orders.

To date, five of the seven new stand-alone customers are already evident in the reported revenues of the company. We expect the remaining two customers to become part of our revenue stream during the coming month.

During previous discussions on our target P&L model, we mentioned that we’re targeting blended gross margin higher than 55% based on product gross margin of 60% and services gross margin at or higher than 30%. We’re pleased to report that we have not only met but actually exceeded these targets for the second consecutive quarter. Tenant margins increased by 60 basis points quarter-over-quarter reaching record level of 57.6%. Product gross margin increased by 50 basis points to 61.5% as a result of favorable product mix, services gross margin remained at the 36% level.

In our recent discussions, we communicated our plans to introduce new product and develop new solutions for new and existing segments, which required an expansion of R&D investment. As a result, R&D expenditures increased during the quarter by 16%, reaching the $5 million level in the first quarter of 2011. This increase was somewhat offset by efficient SG&A expenses management and total operating expenses came in at $8.4 million or 30% of revenues.

During the quarter, we reported record net income of $8.1 million with operating margins of 28% and net margin of 29%. Diluted EPS in the quarter was $0.30 up $0.02 over the previous quarter based on diluted share count of 27 million shares. The fully diluted share count of the company is currently 27.9 million, including stock options and restricted share units. We expect 2011 second quarter share count for diluted EPS to be slightly below the $27.5 million level. Cash flow from operating activities came in at a record level of $8.4 million in the first quarter of 2011.

Moving into balance sheet key metrics, accounts receivable were $15 million, and DSOs remained stable at a level of 45 days. Inventories increased from $11 million to $12 million in the current quarter while inventory returns continue to be above par. The increase in inventories is mainly related to system, which are older already installed at customer sites and are waiting for customer acceptance in revenue recognition.

Deferred revenues increased to $3.8 million by the end of the quarter. It is important to note that the deferred in the balance sheet reflect unrecognized revenues, which were already collected in cash. The other portion, which was not yet collected, but will shift to customers, is presented only as inventory. Capital investments and depreciation in the first quarter of 2011 came in at $0.9 million and $0.4 million respectively.

I’ll conclude with cash reserves, which increase to approximately $72 million in the end of the first quarter of 2011 and provide us with an immense flexibility to execute on our business plans as well as to purse any potential opportunities that may arise in the coming quarter. Gabi?

Gabi Seligsohn

Thank you, Dror. And with that operator we would be happy to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question today now from Edwin Mok from Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Hi, great. Thanks for taking for my question and congrats for great results and guidance. So first question I have is I guess the topic of the day, the timing, regarding the pushed out, I think Gabi in your prepared talked about some customers maybe moving now by from the shipments, but it seems like the (inaudible). Those customers moving off the shipment in the first quarter, do you now feel a little more confident about second half versus I think previously you talked about potentially some moderation in the second half. How do guys think about second half right now, Gabi?

Gabi Seligsohn

Well, thanks for your question Edwin and welcome to the call. First of all, the guidance for the second quarter shows continued growth, which we’re very happy with and which is for us a very good indication. And you rightfully pointed out that we already know that some of that bookings is going into the third quarter. Indeed there is somewhat of a reduction in the level of orders which is expected in the second quarter and you are right in pointing out that many of the vendors have spoken about that that is something that we do see.

The booking level that we have does carry us confidently through the second quarter and somewhat into the third quarter. As for the second half of the year, we believe that the projects that we had previously seen will go forward albeit there is somewhat of a push out of about a quarter.

So how that translates exactly into the second half of the year, I’m not in a situation to report exactly right now. I will say that the business still looks very strong. Despite that push out which is expected, I think the year is intact as far as we’re concerned in making sure that this is a third consecutive year of outgrowing the industry. So we feel pretty good about the second half of the year, but at this point I’m not able to articulate exactly what’s going to happen in the third and fourth quarter. Hopefully, that helps you.

Edwin Mok – Needham & Company

Sure, that was helpful. And I guess your peers also don’t have enough visibility for the second half, so limited here. So kind of a follow-up question on that is, and kind of I’ll get tied to Dror’s comment regarding the seven new customer of which five of them has already started to take equipment. Can I ask him definitely, also five customers, are you guys already shipping to the level that you thought you would have in terms of their level or are you guys just starting that initial shipment and you expect incrementally more shipment coming in the second quarter and beyond? I’m just trying to see the way in terms of offering those customer and obviously one of the investor concern is that you are already shipping to all of these new customers and will have a new incremental driver?

Gabi Seligsohn

Sure. So there are two comments associated with that. The first one is associated with revenue recognition, which was a big part of Dror’s comments, in which if you remember, we reported in the first quarter which was – sorry in the fourth quarter, we reported that a lot of the revenue coming from the penetrations would move into 2011 and that is something that we have seen.

The other good thing is that indeed repeat orders are coming in. And so with the record bookings that we spoke about and I mentioned that standalone bookings were by far the best we’ve ever had. That is a result of actually repeat orders coming from the penetration account. So you should take both comments here. One is the fact that things that we had penetrated with last year are turning into revenue. And the other thing, which is very exciting for us is that, we’re seeing repeat orders coming.

Those orders have not ended as far as we’re concerned. We see a continuation of orders, the level of which obviously I won’t discuss at this point. But we do see a continuation and that’s usually the case when you make a design win. And that's really what we were alluding to last year and we spoke about how important that is for our growth strategy. Once you make a design win, you can expect follow-on orders and they don't tend to be just a single or a couple of tools, they become more significant in that.

The other thing that's happening which is very exciting and I was kind of hinting to is that in our current evaluations and we still have several evaluations and in the new penetrations, a lot of the focus is moving into the EDGE direction which for us is a real growth opportunity. So not only did we penetrate with the standalone into new accounts, these specific accounts are adding applications going in the direction of EDGE, which for us is again a good indication that we will be able in fact to expand our position in these specific accounts going forward.

Edwin Mok – Needham & Company

Yes. You got -- next question that I was going to ask you. I was wondering of the numbers that you guys reported foundries by far much highly weighted this past quarter, I think is a function of market. But in terms of memory side, and on paneling side, any kind of progress you make or you have made that you didn’t report to us especially on the NAND side.

Gabi Seligsohn

Yes. I mean we’ve been doing well on the standalone and memory. You are right that may be in the middle of last year I said that relative to foundry, memory was slower to adopt our standalone metrology as far as we were concerned and the accounts that we were in. We do see an intake of standalone metrology on the flat side. It is starting to grow more rapidly for us. So, yes, I think that you’re going to see continued adoption.

And one of the things that's leading to that is the vertical gate technology which the customers are starting to deploy, and three dimensional measurement is becoming absolutely critical in these situations. So I think actually that there is still lot of growth ahead of us both on the DRAM actually and the NAND-flash side. You did hear me commenting also on DRAM. I do believe that we will see a technology shrink coming up towards the end of the year. I think it’s necessary, I think the more value per wafer is becoming a necessity given the ASPs decrease and also the fact that the high end DRAM market is starting to address a bigger portion of the tablet market with a specialized DRAM. So I think both of those markets are becoming very interesting on Optical CD opportunities. And I think again the – not just the design rule reduction but also the structure is changing, all requiring measurements to be done with Optical CD. To be honest in many cases, the only way to do the measurement is Optical CD. And that’s something that we’re starting to see more and more. Obviously also in the foundry with the very complex gate structures, the people are looking at, people are wanting to do three-dimensional measurement and really the only non-destructive, very high throughput solution is Optical CD for them.

Edwin Mok – Needham & Company

Great, very helpful. If I can leave by asking some question for Dror also. Dror just talk about operating expense in this past quarter, you guys ramp R&D as yet. But SG&A came in a little better than expected. How do you guys think about OpEx in the second quarter or at least what is stated in your guidance (inaudible) OpEx going about $9 million level?

Dror David

Yes. First of all we are working on means to further invest and increase our R&D expenses. Sometimes these things take time and also relate to the timing of specific purchasing of prototypes. So we are working to increase and invest more. I can say that our forecast for the second quarter is similar levels to the first quarter at this stage.

Edwin Mok – Needham & Company

You mean your operating expense, the target is similar to your first quarter?

Dror David

And for the second quarter, our focus right now is similar levels for the first quarter, but we are taking measures to increase operating expenses going forward.

Edwin Mok – Needham & Company

I see. Great, very helpful. And then…

Dror David

Sorry. I’m going to just add those you should expect to ultimately be within the levels that we spoke about of up to $9 million to your question.

Edwin Mok – Needham & Company

Great, very helpful. And just lastly Dror, in terms of the margin profile of your business, obviously really well and even better than what you have guided. I actually have a question regarding service margin. How you guys think about that longer run? Do you – you guys have been above at the mid 30s for service gross margin for several quarters already, and do you guys expect that to be a sustainable level or even growing about just 40% or how do you guys think about that piece and did have a cushion to drive the margin up and down?

Dror David

Yes. You’re right that we’ve reached, I think a pretty good level of the mid-30s is a pretty good level. What will help that go a little bit further up I believe is extended upgrade business.

As we said in the past, upgrade business tends to be more lumpy and you will see situations in which in particular quarters you will see more upgrades than in other quarter. I think that in general given where the industry is right now and the fact that we have successfully rolled out our latest product, the i500, and the next generation product is coming up pretty soon, we’re going to start seeing some upgrades, I think in particular on the integrated metrology side.

The strength of that right now is a little bit difficult to foresee, so there could be situation in which service margins go above this level, but I would say that for now our model continues to be above 30%. We feel comfortable with that level of margins and the kind of revenues that we have right now, which is somewhere around $4 million per quarter.

I do think though and that’s what our service group is working on and they get pushed hard on that, I think they’re starting to be quite successful that was an active installed base of a 1000 tools, we can extract even more business for upgrade. So I think that’s still ahead of us and that does provide some upside potential for the service margins.

Edwin Mok – Needham & Company

Great. That’s all I have, thank you.

Gabi Seligsohn

Thank you.

Operator

Thank you. We will move to our next question today Jay Jenoff, Private Investor. Please go ahead.

Unidentified Analyst

Thanks very much. Very nice execution guys. Couple of questions. The first one is I calculate almost 30% from your market cap in cash, which considering how undervalued your stock is, it seems rather ridiculous. And it sounds like you guys are more inclined towards looking to buy something, I mean as opposed to buying back stock, is that the working model here?

Gabi Seligsohn

Well, I think for us, first of all achieving these levels of cash is something that is very important for us, also as to how the company looks in front of the customer base that we have because their reliance on us is very, very significant these days, much more significant than it used to be in the past.

The cash on hand really allows us flexibility and the flexibility I’m talking about, first of all, as I mentioned, it’s to invest more in the markets that we’re already in because we think we can get it more of them out of the total addressable market that we have.

Secondly, it’s allowing ourselves to aggressively pursue the 3D interconnect opportunity. And thirdly, indeed we are looking very actively at bringing more into the company from outside sources. And so we think that as far as the right direction for us to go that we should use that cash for those three directions and that would allow us to continue the grow the business in the way that we have in our three-year plan.

Unidentified Analyst

Okay. So you’ve decided something other than a buyback is the best use of your cash. In terms of the M&A going the other way, we have news flow today that Applied Materials is looking to pay about a 50% premium to Variance Semiconductor compared to where the stock closed yesterday. Are you starting to see the likelihood of more M&A or consolidation in the semiconductor equipment space now that at this point in the cycle or what are your thoughts on that?

Gabi Seligsohn

I think that there are opportunities out there, I think that there is very good technology out there, and Nova can be a very good house of technology. That deal is definitely a very impressive deal, the size of it, the way the deal is being done and what it offers Applied, but I do think that there is room for more consolidation and we see ourselves as a player in order to bring more into our company and further grow it inorganically.

So my answer is yes, David, there are opportunities out there. I think what’s important for us is that we want to demonstrate our ability to do something like that, but also to continue to grow in a profitable manner. And that’s kind of the measuring tape we put against opportunities that we look at. We’re very, very cautiously looking at things that way, because we’d like to see a growth trajectory coming, but we’d also like to continue to grow profitably as we do that.

Unidentified Analyst

Right. And then lastly just kind of putting the pieces together here relative to the industry situation, you’re growing sequentially in 2Q off of strong bookings from 1Q that extend into 3Q, in effect you’re able to grow as others aren’t is clearly a reflection of your market share gains and the growth in your served market.

If we assume that the capital spending picture normalizes in the third and fourth quarters, meaning push outs go away, how much runway do you have to potentially significantly outgrow the industry based on your served market increasing and your share continue to increase, and possibly some new tools, are you looking on another couple of years of outgrowing the industry here based on what you working on today or is it a shorter period of time?

Gabi Seligsohn

I think that optical CD, I always say I feel like I’m very fortunate to be offering that technology that some looks like a technology that’s laying golden eggs. The role it’s playing is really growing significantly. I think that optical CD as a technology is going to outgrow the industry on a more continuos basis and definitely I think that obviously we’re all impacted by what the industry does, but if the industry continues to perform, I believe we’re going to continue to outperform, not just because we’re part of this optical CD opportunity, but because we’re so strong in our offering.

So I think we’re very well positioned to continue to outgrow. How significant the outgrowing of the industry is going to be is a good question, there is all sorts of ways to look at that. But I do think that we’re definitely in a good position to keep on doing it. And right now our working assumption is that the things are looking good; into the end of the year, yes, there is this kind of pause that everyone is talking about and it’s not a full pause kind of lumpiness maybe in orders.

But overall, I think that the year is continuing to be a very strong year and it seems like right now at least from the ability that anyone has at this point that next year is supposed to be a pretty good year as well. Because of the fundamentals of what semiconductors are being manufactured and for what devices they are being manufactured, and it’s the still the same revolution that everyone is talking about that’s driving all that.

And the fact that we have exposure to the right customers that are playing in that revolution is really what makes the difference. And as I mentioned earlier, Ron, these economies of scale decisions, if they’re made for instance within the foundry space, because we have such good exposure, we are there when one of the foundries wins against the other one, if there is a change of decisions or policies as there recently seems to have been in the case of Apple related business. So that’s kind of how I look at the business. Hopefully, that gives you some feel?

Unidentified Analyst

Thank you.

Gabi Seligsohn

Thank you very much.

Operator

Thank you. We have a question now from Liron Rochman from Oscar Gross. Please go ahead.

Liron Rochman – Oscar Gross

Hi guys, congrats for the results. I’m trying to understand here how you guys are seeing the second half of the year and let’s say based on the booking you guys have right now and regarding the remarks Gabi said before, can you guys film Q-over-Q growth for the second half, or we can’t tell right now?

Gabi Seligsohn

We’re not going to provide guidance for beyond the second quarter right now, simply it’s too difficult for us. We don’t have that level of granularity into the third quarter to be able to say something like that. And also as you can well imagine revenue recognition issue is also coming the way, it’s not just order intake, but it’s also revenue recognition.

I would reiterate what I said earlier on, which is I think that there is a shift in some of the projects, but they are shifting within the year still, how much influence if any will there be on the third quarter, I’m not sure at this point. I am encouraged by the fact that the bookings are so significant that some of them are already known to be rolling into the third quarter. So that kind of helps me, but I can’t really tell you beyond that at this point.

Liron Rochman – Oscar Gross

Okay. And regarding the gross margin, obviously you guys have a target for 55% long-term and in the short-term it looks higher for the second half, can you assume it’s still going to be higher than the long-term target?

Gabi Seligsohn

Eminently it also is a reflection of the level of revenues, but yes, our model for the second half is being able to present gross margins which are at or higher than 55%.

Liron Rochman – Oscar Gross

Okay. And last thing regarding the 3D, can you guys give us some update where you guys standing right now and what you expect for the second half in terms of revenue, if there are any?

Gabi Seligsohn

As I mentioned in my prepared remarks, the product seems to be very competitive. We are very carefully not announcing the details of what the product is able to do, obviously for competitive reasons, but there are no less than five strategic customers who are actively engaged with us right now and looking at the capability and there is quite a bit of excitement there.

We will be shifting initial units during the second half of the year. And as I mentioned in our Analyst Day back in January, our expectation is that revenues will start coming in 2012, for the obvious reason that when we come out with a new tool we evaluate it for a period of time and then we start showing revenues for it.

We are very excited about what the tool can do and we’re also very excited about the opportunity that that market offers. We think it’s going to start seriously contributing to our revenues probably in 2013, but you will see some revenues coming in 2012 as we achieve the end of the year we will be able to hopefully understand better the extensive revenues that we should expect in 2012.

Liron Rochman – Oscar Gross

Okay. Thank you very much and good luck.

Gabi Seligsohn

Thank you.

Operator

Thank you. We now have a question from George, who is a private investor. Please go ahead.

Unidentified Analyst

Good morning, Gabi and Dror.

Gabi Seligsohn

Hi, George. How are you?

Unidentified Analyst

Good. Great execution this quarter, guys.

Gabi Seligsohn

Thank you.

Unidentified Analyst

I had a few questions. First one was, given the rumor kind of shifts in foundry on Apple volume from (inaudible) have you felt any kind of wavering up here due to these things?

Gabi Seligsohn

We have to very careful, because that’s customer confidential information, but there is ongoing activity there. And as I said, we are in a position to enjoy shift in the direction of other foundries if they happen. So we have to be very careful in what we say about that. But suffice it to say, you’re right that there is a lot of noise about that and we feel we’re well positioned to enjoy that change if it happens.

Unidentified Analyst

And I’ll cut my point, you guys would me net negative or net positive for you guys. You answered my question there, thank you. And also moving out towards 3D IC, I’m not sure it’s true yet, but from what you can see on the 3D market in terms of capital intensity in this, is the movement 2D to 3D going to be for Nova you think more or less capital intensive?

Gabi Seligsohn

I’m not sure I would call the current manufacturing, 2D manufacturing, the 3D really kind of tries to say that the chip stacking associated with the manufacturing process. What I will say is that, the capital intensity expected in that market, I would say, for process control is somewhat similar at this point to what we have today in front end semiconductor manufacturing as it stands today.

What is not clearly yet is what number of applications of process control will become in line monitoring applications, which are the ones that always interest to us, because they generate the multiple tool orders for fab. That’s still not completely clear.

And what’s happening right now and that’s why we think that our rollout to the market is very timely, is that customers are mostly at relatively early stages of qualifying the process. As we have mentioned, they have to go through several hurdles. One is to achieve yield numbers, which are good enough for going to high volume manufacturing. The second thing is they have to be able to finish standardizing that process.

So I think capital intensity, the working assumption right now for process control is that it’s going to be similar to what is it in front end manufacturing. But I think as time passes, we will be clear on how much of that is really coming to fruition.

Unidentified Analyst

Okay. Great, thank you. And just sort of follow-up on your earlier comments on edge and perhaps, excuse me (inaudible) I missed some of that stuff, but on edge, you seem rather excited about that, I wanted if you could maybe reiterate the high spots or maybe elaborate more on that on why that is?

Gabi Seligsohn

Sure. And first of all thanks for waking up so early for us. We appreciate that. And secondly on the edge front, really what’s happening is that the design will shrink, is requiring customers to take certain layers that maybe they were able to deposit in one shot and break them down into more steps than the manufacturing process because the tolerance to error is so much smaller once you continue to shrink, and at the 3X, or in this case, 28 nanometer technology noted foundry, that’s really what’s happening. The gage structures are very complicated, the material that they’re using particularly low cane materials and other raw materials and structures are extremely difficult to manufacture in a repeatable way. So their work around for that is to split the process into more manufacturing steps and control each of those discrete steps with a smaller influence on the overall process one at a time.

The cost associated with it is very significant for the manufacturers. I mean, I mentioned I think in last quarter’s conference call (inaudible) telling all of us that a supplier of them, that they have difficulty accepting the fact that they’re going to be probably doubling their capital spending once moving from 65 to 28.

So edge is just another step in that process where they’re saying it’s something like 50% more steps just to make that move. I think overall, that’s a great thing for us, obviously for equipment manufacturers, I’d say even in particular for process control manufacturers because of the need for process control continues to grow as you do these things.

So overall, I think it’s a good picture. It’s exciting for us, it’s been on our radar screen, and we have spoken about the change we have made in the company in the last two to three years, we’ve always spoken about the fact that the growth should emanate from covering more steps in the manufacturing process and edge is a critical step, lithography is a critical step and we also have a very critical deposition step that we’re penetrating into quite aggressively as well.

So that’s kind of something that I will try to share with everyone as much as I can, because I think it’s a good way to look at the growth opportunity for the company and I’ll try to give as much information as we can also in the future as we progress with that.

Unidentified Analyst

Okay. Thank you very much guys and I really appreciate your leadership.

Unidentified Analyst

Thank you very much, George.

Operator

Thank you. (Operator Instructions) We’d now take a question from Marcel Herbst from Herbst Capital Management. Please go ahead.

Marcel Herbst – Herbst Capital Management

Good morning and congratulations for a very good quarter and excellent execution.

Gabi Seligsohn

Thank you, Marcel.

Marcel Herbst – Herbst Capital Management

A lot of questions, all have been covered, but I have a couple more follow-up questions on the housekeeping side. Where there any non-recurring expenses in the quarter, for example for the office opening?

Gabi Seligsohn

No, there were no significant non-recurring expenses.

Marcel Herbst – Herbst Capital Management

Okay. And what impact did the currency translation have on the operating results?

Gabi Seligsohn

We are working through hedging our expenses against the dollar on a continued basis. So practically for the first quarter and the second quarter most of our expenses are hedged at rates which are similar to the fourth quarter of 2010. So there was no impact in the first quarter, none significant expected for the second.

Marcel Herbst – Herbst Capital Management

Excellent. Thank you very much.

Operator

(Operator Instructions) We have no further questions at this time. I’d like to turn the conference back over to Mr. Gabi Seligsohn for any closing remarks.

Gabi Seligsohn

Thank you, operator. Again, I want to thank everyone for attending today’s call. We look forward to speaking to you in the near future and we continue to focus on the business as it continues to move forward. Thanks very much and have a great day.

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